Detection Technology Oyj

OMXH:DETEC

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Hannu Martola, executive]

Good afternoon, everybody. My name is Hannu Martola. I'm the President and CEO of Detection Technology and welcome to follow Detection Technology's second quarter result announcing through webcast.

But before starting just shortly, what does DT, Detection Technology do? We are the eyes of X-ray equipment. We provide our detectors to major medical, security and industrial OEMs and you can find our products in hospitals, in the computed tomography equipment or airports for security screening or various industrial applications, for example, battery manufacturing or food scanning -- food manufacturing lines and so on.

I'm pleased to now report what we have achieved after second quarter and during second quarter. So we reached the sales of EUR 26.1 million, growing about 4%, 3.5% from last year second quarter. We reached much better profitability, EUR 3.3 million which is 12.7% of our second quarter sales.

We had quite big variation in our business units. I mean, Industrial business unit grew really, really nicely, 43%. Majority of that growth is coming from a new acquisition we acquired Haobo and the flat panels, but also without Haobo, Industrial business unit grew nicely. There's now like food industry and so on, the various industrial markets have returned to small growth in this business.

Medical sales was a disappointment. But as expected, Medical, healthcare sector has not been very strong. And especially in China, the health care reform which has been affecting the Medical sales in China was still sort of limiting the sales. However, we have now started to see some very small positive market signals and we expect that that Medical then would start slowly to recover.

Security sales was nice, 27%. And as a big business unit and business for DT that contribute a big part of our group 3.5% growth and sales was growing actually in all areas, especially aviation in security screening applications.

We improved quite constantly our year-on-year result. Cash flow was really strong, and what I think is very nice. So we have now -- this is the fifth quarter in order that the earnings have improved for DT.

On net sales by quarter, slightly better than last year. We guided flat. So this is flat plus, so 3.5%, still above sort of the 0 level. And actually, we have to go back to the 2019 since we have had this level of sales for the second quarter.

On EBIT, a clear step from year-on-year numbers, 12.7%. Actually, in the company we are quite pleased with this result. I think it was as expected, maybe slightly better than expected. But we also have to note that this 12.7% is still below the midterm target that we have set, which is 15%. But for second quarter's sales and result this was quite okay.

By business unit, Security now became the biggest business unit of DT having about 44% of our total sales. Medical after going down one-quarter or 1/4, 36%, and Industrial now is 1/5 or 20% of our sales.

On markets, we clearly grew in Europe, Middle East and Africa, actually very much driven by security demand. So even 56% on annualized -- on a year-on-year basis Americas went down quite a bit. There are some exceptional items that are affecting the Americas sales. And then the Asia Pacific was very much the same as last year.

Out of the total sales, APAC was 66%, a bit down from what we had a year ago and Europe, Middle East, Africa, about 30% and Americas 6% of the total sales.

On looking at the full year, first half now is roughly a bit shy of EUR 50 million, so about flat compared to last year, 2% growth, and we look forward now then into higher growth for the second half of the year as we have expected and informed to the markets.

The EBITA is 11.4%, and I think that's a good start for the full year and when we are looking at the second half then will be -- should be better.

On by business units, this is very similar in the first quarter, so Medical heavily down due to the China healthcare reform and anticorruption campaigns and then both IBU and SBU with nice over 20% growth.

And by region, it's about sort of the same, Americas down 60%, but then Europe up close to 40% and Asia Pacific, flattish -- flat plus 3.2%.

On finances and key figures, just a couple of items to note here. So the R&D spending was about same than last year, EUR 3 million in percentage its 11.7%. We had very nice cash flow. So EUR 3.9 million and EUR 6.8 million for the first half.

Investments came down after we finalized the Oulu clean room and Oulu facility. So first half is EUR 1.5 million and out of that second quarter is EUR 350,000. And then earnings per share is EUR 0.15.

On strategy highlights, we now finalized and established a daughter company, a legal company in India. Now we are building service and manufacturing and assembly site and center to India. Also, we finalized the Oulu site and factory so that we are ready now to make about 10% of our sales from Oulu site for the -- during the second half. And then we continued on launching a wide range of TFT panels from Haobo, Haobo Imaging, and that has gone as planned, including the new dynamic panels called IGZO panels.

Out of the other events, we have been now implementing the target setting and KPI system within the company called 1+QR, which is a very similar then OKR system known. And then we also are starting with -- to take use the sustainability reporting system, CSRD, which is due then for next year.

On sales expectation. So on Industrial, we expect Industrial to grow double-digit for third quarter, Medical to turn into a slight growth after now sort of disappointing first half, and then Security also continued in double-digit growth. And as a company, the full guidance is that we expect our total net sales to grow double-digit for third quarter and also for the full second half.

And as financial targets remain the same. So at least 10% annual growth, at least 15% or better operating margin, EBITA and then out of the net proceedings dividend of 30% to 60%.

So we look quite -- despite some challenges in the world and so on in our business, we are now quite sort of positive on our look on second half and expect now the business to turn into double-digit growth, despite the fact that also in like the healthcare sector in China, which is our main market for healthcare is -- there are not yet any clear signs of recovery, but some sort of starting signs of some increasing orders and sort of a sales forecast. And then the Security and Industrial area should be now, as I said, continuing to grow.

So this in a nutshell, what's cooking at DT and what did we do and achieve on our second quarter. And if there are any questions, I would be pleased to answer.

[Matti Riikonen, analyst]

It's Matti Riikonen from Carnegie. A couple of questions. To start with the U.S. and Americas. You mentioned exceptional reasons why the net sales there is down, and it's up in Europe. So could you remind us what those exceptional reasons are? Are the customers kind of taking deliveries in other parts of the world?

[Hannu Martola, executive]

Yes. That's -- I think in -- of course, U.S. is the world's largest market. Than out of the Americas sales, U.S. the most important market, even though we have some sales for South America, as an example too. And then another topic is that in U.S. there is very little manufacturing actually taking place for most of the -- even equipment, special detectors are imported.

But as we sort of measure and report our sales is based on where do we ship and where do we invoice. And we have some fairly large customers in U.S. And for example, one customer is moving and they have built up some stock and there's some -- take some time before they are taking stock and so on. So this is the reason why I used this sort of exceptional world -- or exceptional word. And the U.S. sales and Americas sales, we believe, is now on a consecutive basis, will be improving for third quarter and will be improving for fourth quarter and getting sort of back to, in a way, normal and also into the growth trajectory.

[Matti Riikonen, analyst]

So what you're basically saying is that the growth in European sales is not kind of explained by weak U.S., but it's just U.S. customers not taking deliveries at the moment and others are basically doing quite well, actually?

[Hannu Martola, executive]

Yes and no. I mean, part of the European -- part of the Europe, Middle East, Africa sales growth is actually going to the Americas and like the U.S. market. So both are true.

[Matti Riikonen, analyst]

Then about the sales mix in Q2, was it quite normal? Or was it slightly better than you might expect? I mean Medical was quite a lot down, others were up. So was there something peculiar in the profitability?

[Hannu Martola, executive]

Yes. The mix is that what we've -- I mean, of course, it's when you anticipate. But I mean, let's say, like during the spring in the beginning of the year, we would have not thought Medical to go down minus 25%. We knew that it's going down and maybe close to 20%, but it's maybe a little bit more. But also then I think both Security and especially Industrial was better. And we are quite pleased that now Industrial, outside the Haobo, is also growing and the markets are pulling.

[Matti Riikonen, analyst]

But basically, the sales mix that you had does not explain in any way the margin development. So it would have been the same, even though the kind of growth rates would have been much closer to each other. Is that right?

[Hannu Martola, executive]

Well, sales mix naturally always explains the margins, that's the source for the sort of throughput and margins. But we have -- I mean, inside also the business units, there's some fluctuation, differences between the customers and depending on which products are we selling. So there is more like a variance from that point of view, not just that from the business unit itself.

[Matti Riikonen, analyst]

I was just thinking then, when you said that the demand for TFT panels has been good. And since that is a new product for you, you might think that there would be some margin kind of addition related to those revenue streams. So is that correct? Or does it have the same profitability kind of pattern than others, the old products?

[Hannu Martola, executive]

In -- I mean the TFT panels very much are going to Industrial applications, like in China a little bit Medical and so on. In average, actually, the margins are quite similar than the average margins for DT. But there is differences if you look then different applications like Industrial and Medical. There are some differences then if you look inside.

[Matti Riikonen, analyst]

And then in the Industrial business, the growth rate was quite nice while it was not nice in Q1. Was there some exceptional circumstances in Q1 -- Q2 making it so good? So is it basically something that you just happened to gather quite a lot of business in Q2? Or is it just something that could be replicated in the latter part of the year? I mean, do you still going to -- are you going to have that kind of high growth rate going forward?

[Hannu Martola, executive]

Well, I mean, the exceptional a little bit was in Q1. There was still some stock correction from last year and also the -- like the food industry, which is important for DT legacy, IBU, it was not sort of pulling. And now the full IBU, I think markets were more like normalized, and we expect this to sort of continue. And that's why we believe that the IBU would be also growing double-digit for third quarter.

[Matti Riikonen, analyst]

Then finally, the subsidiary in Delhi. Could you describe a bit more what you are going to achieve there? So what's the kind of production capacity? Should it be somewhere like the Oulu -- Oulu factory at some point, 10% of your product sales? Or is it bigger than Oulu? And when will it be in use? And how much CapEx are you putting in it?

[Hannu Martola, executive]

So the India subsidiary, and I think the long term bottom line really is that India is spending big on infrastructure, and they have to do it in a way to get the country developing and growing. And that will mean a lot of investments also into security, healthcare and industrial area where X-ray is needed.

From DT point of view, we have now established and found company in New Delhi area, and we are taking a step at a time. We are not planning to do anything massive. We are planning to do enough so that we can market and grow our sales there step-by-step.

At the beginning, we have a small assembly in assembly site as we have actually in Oulu. It will not be driving and needed any significant investments from the point of view of today's sort of plans. But we are naturally following it. And also, there might be some regulatory changes coming in there and so on. So we have to then adapt based on the needs.

The first step we want to take is we want to be and become a local player in India, meaning that we are making made in India products for India markets, and then we continue and grow the business according to the needs.

[Nikko Ruokangas, analyst]

Nikko Ruokangas from SEB. I have also a couple of questions, and starting with China and business outlook there. So how did that develop during Q2 compared to your expectations prior to the quarter?

[Hannu Martola, executive]

I think China market, in a way, for let's say, Security, Industrial was like expected. Medical side was a bit more, let's say, a bit less than what we anticipated, not very much. We expected the first and second quarters to be fairly sort of a lowish in Chinese healthcare.

[Nikko Ruokangas, analyst]

So do you share that we now also that the outlook now for China Medical for H2 is slightly weaker than you would have expected in the beginning of the year?

[Hannu Martola, executive]

I think still probably the full second half is a bit challenging in China. Most probably, it will -- there will be some little growth, but that is also due to the fact that the underlying quarters are quite -- for everybody are quite sort of lowish. And then it is of general sort of a belief that 2025 will then be very strong in China.

[Nikko Ruokangas, analyst]

So do you expect that you could be able to grow also in Q4 in Medical, even though the comparable is then more challenging than in Q4?

[Hannu Martola, executive]

Yes. Our fourth quarter last year was a bit better due to some budget item in the market. So fourth quarter was better than third quarter on last year. What -- I'd rather would say that we look forward on the Medical growing for the second half then how it's split between the quarters and so on. So we don't expect this kind of like healthcare reform to yield out with a big bang or anything like that. It's sort of slow. Let's say, starting to recover slowly and then at increasing pace, hopefully, next year.

[Nikko Ruokangas, analyst]

Then where all of the cost savings already visible now in Q2. And then speaking of the Indian subsidiary. So how much will that increase your costs?

[Hannu Martola, executive]

We try to be tight with the costs and with the spending, I mean, the savings that we achieved during like last fall and so on, they are visible. They were visible in first quarter and now also for the second quarter. And we -- like I said, we don't plan to do anything like really big at once in India that would drive a huge cost spending nor huge investments. We plan to take like one step a time and gradually increase.

Also, we must remember that we will then get the income from India. We already have some sales -- nice sales in India, and we expect that to grow. And then part of the things can be then paid with the deliverables from the sales.

[Nikko Ruokangas, analyst]

Then last one from me. There have been new liquid limit set in airports in Europe for CT detectors due to some technical issues. So can you open what kind of issue this is? And are those components related to your -- are those problems related to your components? And could that lead delays in investments in Europe?

[Hannu Martola, executive]

Yes. So what actually European Union has announced, was it last Wednesday or Thursday, that from 1st of September, they have defined what is the maximum size of a single item, single pack of liquids in a bag. And the new definition is 100 millimeters (sic) [ 100 milliliters ]. One can have several of these items in the bag, but each bag is maximum 100 millimeter. So before this kind of like a definite spec was -- did not sort of exist quite many airports, by the way, were using their own sort of restriction of 330 milliliters.

And what we have understood is this kind of like, to scan and understand what's inside in the liquid with computed tomography is fairly sort of it's complex, and it requires quite sort of -- quite developed algorithms. And to our understanding now in some tests, they have found out that the results were not sufficient and now they have set out this kind of temporary restriction for the industry until things are then resolved to our understanding that relates to the, let's say, algorithms of the equipment, it doesn't relate to ours or any of our competitors' detectors itself.

And well, everybody in the industry and everybody's flying is then restricted of this same sort of requirement. And we don't foresee that this would have any -- any big impact into the actually plans of installing CT equipment or the airports buying new equipment. It's just, let's say, a new definition that -- the benefits of using CT are still there, and they are quite actually big. I mean, meaning that people can leave their laptops in, they can leave their liquids in, but in sort of items of maximum 100 milliliters. And with these kind of things that you can leave this inside at the airports, it will mean faster passenger throughput and smoother operation and actually even better, better security for the airports.

[Nikko Ruokangas, analyst]

So you don't expect the airports to wait for the issue to be solved before investing in new equipment?

[Hannu Martola, executive]

No, we don't think so. And well, temporary is temporary, we don't know. I mean even if it would be permanent. In our opinion, it would not have a big impact on the need of airports renewing their technology and for the passengers to have a more pleasant passenger experience on -- to being checked with computer tomography.

[Waltteri Rossi, analyst]

Waltteri Rossi from Danske Bank. First question on TFT sales. You said that they sowed in Q2. Can you give any kind of indication on the percentage year-on-year growth or what kind of share of Industrial sales they were?

[Hannu Martola, executive]

Well, I mean, the very nice Industrial sales growth, 43%. The reason is that we did not have any TFT sales on the underlying quarter, so 23% second quarter. We still -- we actually took Haobo into our books from 1st of July. So starting from third quarter. So that is also then explaining this very nice 43% growth. Majority of the growth came from TFT panels due to the fact that I explained. And -- but there's also, I mean, nice growth in the legacy IBU part.

[Waltteri Rossi, analyst]

But roughly like how much is TFT sales as of now of the Industrial segment's sales?

[Hannu Martola, executive]

Well, we don't report it separately. And actually, part of the TFT sales is actually Medical. And so a minor part of the TFT sales is going already to Medical and major part is Industrial. And what we are now working on is having these TFT panels approved by midsized and larger-sized medical players, dental players and then that would be yielding a higher growth then hopefully starting from late next year.

[Waltteri Rossi, analyst]

Actually, my next question kind of relates to that. So you mentioned the IGZO-TFT solutions for dental imaging now. But are there any other sales outside Industrial segment within TFT solutions?

[Hannu Martola, executive]

There is -- well, there's -- dental is the most important for Medical. There also some other applications and then Industrial area, there is various, I mean. And one very interesting and exciting application for TFT panel is a battery manufacturing. So through the battery manufacturing starting from the, let's say, minerals and raw materials into the cells -- battery cells going to the battery modules and then even sorting of batteries and reusing the metals and the precious materials there. So X-ray is needed.

[Waltteri Rossi, analyst]

Okay. So currently, like some sales in Medical already on TFT, but not in Security, like none?

[Hannu Martola, executive]

Yes, that's interesting. Actually, this TFT panels, it's almost nothing in Security. It's -- that's just how it is. So there's very little applications for flat panels in Security area. Security is line scanner and CT.

[Waltteri Rossi, analyst]

Then on the Medical segment's growth expectations, you say it's going to grow in H2, but is it more like double-digit, like low double-digit or higher rates? Any indication on that?

[Hannu Martola, executive]

Right now, I mean, we cannot say anything else, but we believe that it's going to grow. How much? Time will then show. I mean, they are so, let's say, small signals and -- like the China market, which China is a hub -- global hub for healthcare CT equipment. So it's very difficult to -- even I mean, we have been in July quite actively talking to our customers and so on. It seems to be that nobody is -- nobody has a view. And I understood also the big healthcare players, general healthcare, Siemens, Philips, Canon, they are 4 biggest. They also -- I mean, they give and they gave from the second quarter results the same sort of message.

[Waltteri Rossi, analyst]

Then 2 quick ones still on SBU. Can you specify what markets specifically performed well or developed well in the west in CT upgrades? Any like specific comments?

[Hannu Martola, executive]

Europe and U.S.?

[Waltteri Rossi, analyst]

But within Europe, like...

[Hannu Martola, executive]

Yes. There's various. I mean, there's -- I think there was one announced in its airport by airport, one in Switzerland and was it [ Zurich and Anders ]. So I mean, overall, the market where CTs are installed. And we actually -- in many of these, we are actively involved. So we have a good -- we are a market leader in this computed tomography.

[Waltteri Rossi, analyst]

Then maybe it's a bit broad question, but you mentioned also the accelerated growth in the global security market. Your wheel on that strengthened. What are the specific reasons on that? Or like what are driving -- what is driving the -- your increased expectations there?

[Hannu Martola, executive]

I think in -- the big, big driver is when you watch the news. I mean what's going in the world. There's a lot of concerns and a lot of things happening in countries and governments want to sort of protect their citizens and people by various means of screening and scanning technologies and that is very typical case for X-ray.

[Joonas Ilvonen, analyst]

It's Joonas Ilvonen from Evli. You already kind of answered my question regarding the Industrial segment's Q2 growth rate, namely at the 43% growth was mostly -- largely attributable to the DTS acquisition. But could you maybe still comment on the legacy business growth? I mean, was it recovery in the legacy business? Was it like mainly driven by this food industry, which has been -- which was rather soft in the past quarters?

[Hannu Martola, executive]

Yes. I think yes. I mean, the big change was namely -- I mean, especially in food. I mean the IBU legacy, as we call it, it's a set of quite different applications. And one of the bigger ones is food. And especially food was during the first quarter -- the sort of exceptionality was there that there was some stock correction and the markets did not behave as everybody thought during '23 and it yielded out as end customers having some stock, and that was corrected out during first quarter. So now the stocks are being used out and it's more back to the sort of normal business.

[Juha Kinnunen, analyst]

Juha Kinnunen from Inderes. Plenty of questions have already been asked, but I have a couple of more. Firstly, about Haobo or DTS, it seems that you are kind of getting traction then right now. Is everything developing in order for your plan to work 2025 to get the medical approvals and the bigger Industrial clients?

[Hannu Martola, executive]

Yes, I think the very important is the yielding of new products that is going as planned. And then the internal things that we are doing there developing the team and training like we have actually in August, we have a large sales training -- global training for TFT technology and how to do the sales and how to lead, manage the accounts and so on. So these kind of things are ongoing and going as planned. So if we look also the financing and so on, we are on track. So we are -- as what we planned for and what is now being executed is taking place.

[Juha Kinnunen, analyst]

If I remember correctly, you just said that your target is that Haobo will grow faster than DT, I suppose that's still intact. But could you give us any more color on that? How is the growth outlook for coming years?

[Hannu Martola, executive]

It's -- we must note that Haobo still is fairly small, which also then means that the percentages can be fairly sort of -- the variance can be fairly wide.

[Juha Kinnunen, analyst]

Fair enough. Last question about the guidance. You said that in the third quarter, you expect double-digit growth in the second half. You expect that double-digit growth. But do you expect double-digit growth also in the fourth quarter?

[Hannu Martola, executive]

We expect third quarter double-digit and then second half. Fourth quarter still is a little bit question mark. Also, I mean, how is like the China healthcare market sort of developing and so on, so that remains to be seen. The visibility for third quarter is that we are double-digit, and we will be also double digit for the full second half.

[Matti Riikonen, analyst]

Matti Riikonen from Carnegie. One question still regarding China. If we exclude the Medical business, which is in a somewhat non-standard situation in China. Did Chinese business grow in Industrial and Security together?

[Hannu Martola, executive]

The thing is that DT has been very much growing with the pace of our Chinese economy growth in the recent years. And China has been, therefore, quite important market for us. During this year, actually, the importance of our Chinese impact to our growth has lessened, and we have actually grown more in the Western market.

[Matti Riikonen, analyst]

But you're basically saying that you grew still in China?

[Hannu Martola, executive]

We -- actually, we are fairly sort of -- I mean, one must now remember that we didn't have the Haobo in the last year sales numbers for second quarter. So that is a little bit. And Haobo is having us being a Chinese company, so has a lot of sales in China until we then start to sell more of those products outside of China, too. The importance of China to our growth is -- has lessened.

[Matti Riikonen, analyst]

But would it be so that excluding Haobo's net sales contribution, the kind of organic growth or growth without Haobo would have been -- would there still be growth in China?

[Hannu Martola, executive]

If I say it this way, if one takes out the Haobo sales from our second quarter, DT sales in China went down from last year.

Okay. Thank you for your questions. I mean do we have any questions from the webcast or?

[Unknown Executive]

No further questions online, yes.

[Hannu Martola, executive]

I think we are then ready to conclude right in time. And I thank you for the audience and viewers for your interest and attention and wish everybody for a very nice week. Thank you.